On the blogs

Kalecki And Keynes On Wages -- by V. Ramanan. Keynes' reply to Dunlop and Tarshis on the pro-cyclicality of real wages is available here. This is an issue I still discuss in my macro classes, that is not part of any manual I know

How Central Banks (and even Keynes) Misled the Public About Banking and Money -- Perry Mehrling on the Bank of England's admission that money is endogenous. In all fairness endogenous money is quite old and no central bank ever pretended they controlled money supply other than in the 1970s, when they tried and failed. So it's monetary economists (and Keynes in the GT, but not in the Treatise for that matter, where he used a Wicksellian approach)

Two Views On Introductory Economics -- Robert Vienneau on Noah Smith and Robert Paul Wolff's views, which basically are the marginalist supply and demand versus the surplus approach

Introduction to Economic History -- Brad DeLong posted the link to his graduate history course with Barry Eichengreen. I used to teach a graduate course in economic history too

Did socialism keep capitalism equal? -- Older post by Branko Milanovic that I missed somehow, and he twitted about recently

The Chinese Economy and more at the Rick Smith Show

Chinese slowdown and the world economy

The Conference Board argues that Chinese official data should be taken with some skepticism. Nothing new there. They have adopted a new measure, which implies "Chinese economic growth at a more realistic 3.7 percent" for the recent past. In this scenario, interestingly enough, "it’s likely that the bulk of China’s slowdown has already taken place since 2011, even if unapparent in official statistics." So the picture is probably worse than the official one (as shown below, from The Economist)

So China will grow at about 4% and has already been growing at that pace for a while, if one believes the Conference Board (in the official data above one might think there is more space for a slowdown, but clearly it has gone already down too). The big questions are whether this will continue, and what would be the impact for the global economy (and the US).

Arguably the slowdown is the result of the transition from an export-led development strategy to a domestic, consumption centered economy, compounded by the problems of an unregulated banking sector, the infamous shadow banks. Note, however, that most problems are associated to domestic demand, and debt in domestic currency. China still has current account surpluses and huge external reserves, even if the latter have decreased. So the problems of a typical developing country, which cannot grow given the external constraint, are nonexistent. Also, it is true that some firms have debts in dollars (and revenue in yuan), and the depreciation of the yuan poses problems, but again the People's Bank of China has enough dollars that rescuing and absorbing the costs of exchange rate risk should be a minor issue. This is not to say that a further slowdown is impossible, but if it continues it should be counted as a policy mistake, not a structural constraint.

On the effects on the world economy my impression is that there is also a great deal of exaggeration. China is the second largest economy in the world, for sure, and has become central for the global economy in many ways. But its role in the global economic problems has been overstated. In Brazil, for example, the Chinese slowdown played virtually no role, as I discussed here. In the US the usual complain is that the depreciation of the yuan is behind deindustrialization, and that the Chinese crisis, that has led to a more depreciated currency, is hurting the manufacturing recovery. I am skeptical of the argument. The figure below shows manufacturing employment and a broad trade weighted exchange rate for the US.

As it can be seen the decrease in manufacturing jobs, which started in the early 2000s (before that it was more or less constant; see discussion here) is connected to the entry of China in the World Trade Organization (WTO). But the collapse of manufacturing jobs went hand in hand with a depreciation of the dollar. And some of the, admittedly slow and small, recovery since the 2008 recession has gone with an appreciation of the dollar. This indicates that Free Trade Agreements (FTAs) and the WTO play a more important role than exchange rates.

China is important, but the notion that it will derail the US recovery seems incredibly hyperbolic. My bet is the US will continue its slow recovery, and the Fed will increase interest rates at an even slower pace than they suggested, as the last meeting indicated.

The Mission of Radical Political Economy

The mission of radical political economy is to accentuate the perseverance of critical social scientific enquiry. As such, the aim is to make palpable how the insights of social justice research widely make apparent how the global socioeconomic system does not automatically generate efficient situations whereby unique organizations of production, exchange, and distribution guarantee the attainment of maximum social welfare.

The idea that humans are simple instrumentally rationalists, who supposedly oscillate like a homogeneous globule of Hobbesian brutes, is conclusively a fiction. Radical political economy exposes hidden complex social fractures that limit the capability of humans to safeguard social assets, social claims, and social ties requisite for sustaining an institutional nucleus for human survival. Hence, the goal is to embrace scholarship that evinces the impingement upon the accruement and management of resources vital for catholic cogitation, and realization, of conscious desires for humans to reach their full potential.

In this sense, the purpose is to establish the appropriate consciousness needed to untie the Gordian knot of social complexity, in order to surpass rudimentary assumptions concerning the nature of human social interaction. Accordingly, the concern is with elucidating the intrinsic causal social relationships—the Hegelian ‘notion’ of truth submerged and contained within the confines of appeared ‘being’—that furnishes meaning and understandability, so as to strengthen a philosophy of praxis that strives to build the social conditions for a reconstruction and reconstitution of the social world, such that higher stages of human development are sought and achieved.

In other words, what is requisite active engagement in the construction and strengthening of a broadly shared paradigmatic and methodological orientation that emphasizes the trenchant questioning of manifest social phenomena, in order to expose the underlying structural dynamics that engender mass deprivation and dispossession. This is a tireless exercise in solving the inherent problems related to relationship between abstraction and social reality, in order to elucidate the philosophical, metaphysical, epistemological, ephemeral, and ontological qualities that condition the human lived experience and, regrettably, foster the unnecessary barriers for humans to be masters of their own social organization.

The human brain confronts matters in the most efficient manner possible; so much so that it often becomes counterintuitive to undergo analysis that extends beyond the simplest explanation, even if that explanation is suspect. It is in this inherent method where dogma is born. This process of edification, however, has the power to overcome innate tendencies towards such reductionism. Since radical political economy presents an authentic humanism, which posits as fundamental that human beings of all social locations subjected to domination must fight for their emancipation, then this predisposition towards apathy—intensified through systems of coercive, disconnected, and hierarchical social institutions—can be broken down, spawning a community that is both cooperative and collaborative, whereby all human dignity, creativity, and survival are held in the highest regard.

Another post on radical political economy is here

Bob Pollin on Clintonomics

At The Nation. Few important points. As Bob notes Hillary does invoke the mantle of Clintonomics. In his words:

"In trying to burnish her credentials as a can-do populist and to portray Bernie Sanders as a purveyor of naive socialist fantasies, Hillary Clinton has increasingly invoked Bill Clinton’s presidency as her economic policy lodestar."

 And Bill Clinton's program was not really progressive. Again:

"The starting point for understanding Bill Clinton’s economic program is to recognize that it was thoroughly beholden to Wall Street, as Clinton himself acknowledged almost immediately after he was elected."

 His Treasury Secretary, one of them, was Robert Rubin, ex-chairman of Goldman Sachs. And financial deregulation, which is at the heart of two bubbles, and two recessions, continued in this period. Bob says:

"A major driver here was Wall Street’s craze for Internet start-ups... Throughout the bubble years, Clinton’s policy advisers, led by Rubin and his then protégé Larry Summers, maintained that regulating Wall Street was an outmoded relic from the 1930s. They used this argument to push through the 1999 repeal of the Glass-Steagall financial regulatory system that had been operating since the New Deal. The Clinton team thus set the stage for the collapse of the Dot.com bubble and ensuing recession in March 2001, only two months after Clinton left office. They also created the conditions that enabled the even more severe bubble that produced the 2008 global financial crisis and Great Recession."

A good analysis of the limitations of Clinton's economic policies is in Bob's old paper Anatomy of Clintonomics.

Consumer credit and mortgage finance in the 1920s

I've been reading Robert Gordon's The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (The Princeton Economic History of the Western World), that I bought at the ASSA Meeting in San Francisco. There is a wealth of data. One topic discussed here before was the expansion of credit in the 1920s, and the role of the housing market in the boom of the roaring 20s. Gordon says with respect to the housing market:

“One reason homeownership rates soared in the 1920s as part of the massive building boom of that decade was a widespread loosening of credit conditions that allowed families to take out second and third mortgages. The value of outstanding mortgages soared from about $12 billion in 1919 to $43 billion in 1930 (i.e., from 16% to 41% of nominal GDP). Figure 9–2 plots the ratio of mortgage debt to GDP against the non-structures consumer debt ratio already examined in figure 9–1. The differing left-hand and right-hand axes indicate that mortgage debt for structures during the 1920s was consistently seven times higher than for non-structures consumer debt. The longer view in figure 9–2 shows that the value of outstanding mortgages was roughly 20 percent of GDP from 1900 to 1922.”

“Ratios to GDP of Non-Structures Consumer Credit and Residential Structures Credit, 1896–1952.

Sources: Olney (1991, Table 4.1), Gordon (2012a, Table A-1), and HSUS series Dc903.”

The Great Depression put an end to the roaring 20s. The unsustainable expansion of consumer credit and mortgages seems to have played, as much as in the last crisis, a significant role. 

The Great Depression and the Great Recession compared

So I teach a course on the two (old syllabus here). One of the initial classes looks at Eichengreen and O'Rourke's comparison of the two events, and how, even though at the beginning the shock seemed similar, the recovery has been faster the second time. O'Rourke had noticed in his blog last year that the current recovery started way before, but has been so slow that now the 1930s look better when industrial output (rather than GDP) is used as a measure. Below the same data for the US economy (he uses world industrial output).

Note that I added more of the 1930s recovery, and one can see the effects of the Roosevelt recession in 1937-38 (the indexes are monthly and start in October 1929 and December 2007 as 100 respectively). Industrial output growth has slowed down in the last year, by the way. I don't think we are on the verge of a recession in the US. My guess is that sluggish growth will continue. But it is an additional reason to be cautious about hiking interest rates, and presuming that the economy is all fine.

On the blogs

Funding a national single-Payer system -- By Gerald Friedman in an old issue of Dollars & Sense. Not the exact same plan as Bernie's, but close enough. The point is that is feasible and cost effective. And we should try that, even if the powers that be will push back

Economy Can’t Withstand 4 Fed Hikes In 2016 -- Larry Summers says measures of inflation are exaggerated and the FOMC will have to reverse its current course in the future. More dovish than Yellen (so maybe he would have been a better chairman)

The dead hand of austerity; left and right -- Simon Wren-Lewis on austerity

Graph/Table of the week: Recovery for the few -- URPE blog, on how only the people at the top benefited from the recovery

The Free Market and the Hypocrisy of Small Government at the Rick Smith Show

The strongest, most durable economy in the world, but very unequal

Obama went to Detroit this week, and defended his economic record, including the bailout of the auto-industry. He went further on the offensive, as in the State of the Union, and suggested that Republican candidates that complain about the economy don't have a clue. In his words:

"The United States of America, right now, has the strongest, most durable economy in the world... So when you hear people -- I won't say who -- but when you hear people claiming that America is in decline, they don't know what they're talking about. They're peddling fiction during a political season." [full speech here]

On the other hand, Bernie Sanders (Obama was certainly referring to the GOP candidates, not Bernie) has made the center of his campaign the poor state of the economy, the fact that only the wealthy have benefited to a significant degree from the recovery, and that we need revolutionary changes, including a higher minimum wage, health care for all, and free access to public education, besides re-regulation of the financial sector (breaking the too-big-to-fail banks as part of that). For example, see his take on democratic socialism here.

So who is right? In a sense, both are partially correct.

In a very broad sense, Obama is correct. Meaning that the US is not only in the middle of a recovery, but also that fears of the decline of American hegemony, economic and military, are incredibly exaggerated. The US spends way more than any other country in military terms (and the differences are probably underestimated) and there is no serious security threat to US global dominance. The more than 800 military basis abroad are clear indication of that. The expansion of NATO to areas that were for a long while considered out of reach in Eastern Europe is one example. And even if there is, and there will be more blow back, because of the disastrous decisions in the Middle East, there is little doubt that no other country has the power to resist US threat of military intervention.

But more importantly, American corporations are still dominant, with a significant amount of the technological innovations that will dominate the global economy in the future still coming from the US. And one should note a good chunk of that comes from the Department of Defense (DoD), in particular Defense Advanced Research Projects Agency (DARPA), and other government agencies that are crucial for technological innovation. Think, for example, about Google's driverless car, which would be impossible without DARPA's Grand Challenge. Note that private corporations depend, directly and indirectly, from the hidden developmental state, that promotes, subsidizes and funds many of their efforts.

So in a very real sense the American economy is still the strongest and the most durable economy in the world, as Obama said. And yet, most workers in the US have not benefited from the continuous dominance of American corporations. Only the ones at the top have benefited in any significant degree. Real wages have stagnated and lagged behind productivity, as it is well-known, and in this recovery only more recently have real wages started to increase, modestly, one might add. Even the labor market, with unemployment at 5%, while much better than Europe and many other advanced economies, is still relatively weak. The increase in employment has not been sufficient to increase the employment-to-population ratio from the same low levels that it reached after the crisis in 2008. That is, most job growth went hand-in-hand with the increase in population.

So Bernie is correct too (and in some weird way right-wing populists complaining about American decline are too, even though their pro-corporate policies would make things even worse). American corporations and elites are doing fine. The rest of the country not so much.

Wall Street Journal is nervous

WSJ op-ed concerned that "the possibility of an extreme election outcome is no longer unthinkable." Inequality in the 1920s and the Great Recession brought FDR and radical reform. As it turns, Obama was more moderate than people expected, and maybe there is still hope for more radical reform ahead.

On the natural rate and being always wrong

So I saw that someone linked to an old post of mine in a discussion on Jared Bernstein's blog. The discussion is on productivity slowdown.

In that post I quote Alan Blinder on his views (slightly more than a year ago) on the natural rate. He said :

"the 'central tendencies' in the Federal Open Market Committee’s latest published forecasts range from 5.2% to 5.5% for the 'full-employment' unemployment rate, and from 2% to 2.3% for the potential GDP trend."

So unemployment should be below the natural rate now, and arguably that could be seen as a reason for the FOMC hike last month, although I doubt that Yellen thinks we're at full employment. As I note on that post Blinder was wrong in the 1990s too about the potential GDP trend. I don't expect any surge in inflation any time soon. But it is amazing how serious economists can be wrong almost all the time.

Immigration and wages

A short op-ed in the Wall Street Journal, of all places, suggests that David Card's famous work (subscription required) on the effects of Cuban immigrants on real wages in Miami was probably correct, meaning immigration does NOT depress wages or lead to higher unemployment. Peri and Yasenov's actual paper is available here (subscription is also required, I'm afraid).

I do have problems with the mainstream interpretation that real wages and employment are determined in the labor market for sure. Employment is determined by aggregate demand, as we still teach in most macroeconomic manuals, since Keynes at least lives in the short run. And real wages are not determined  by supply and demand, or by productivity and intertemporal decisions of workers. Or at least not just by that. The old classical political economy tradition suggested that supply and demand were one of the many factors that affected the bargaining power of the labor class.

At any rate, worth checking the results, in particular, in these times, in which saying that immigrants (the undocumented ones; btw, Cubans have special status in the US, I guess that's why you can have two Cuban-Americans in the GOP primaries, one particularly harsh on immigrants) are the source of all problems has become acceptable.

A comment on Dean Baker's comment on Paul Krugman's comment on Bernie Sander's Health Plan

Away for while, and back in full meta-post. I guess all posts are comment on another post, this one is just one more degree of separation. So Krugman sides with Hilary over Bernie. Let's extend Obamacare, rather than get Medicare for all. The reason is mainly political calculation. It would be impossible to get a single payer system covering everybody. The power of insurance companies, and pharmaceutical firms, combined with the insidious role of money in the political process, implies that Bernie's position is a non-starter. Also, Krugman cites the fact that the increase in taxes would be a problem with the middle class.

Dean Baker basically accepts Krugman's arguments (not sure if that means that he also thinks Hilary is right, but somehow I doubt it), but makes two caveats. On the political level, Dean says, correctly I believe, that you need Bernie, or others like him, to move us in the right direction, and perhaps at some point in the future the US will be like other advanced and civilized societies with health coverage for all. Second, Dean suggests that the government allows pharmaceutical firms to get away with exorbitant prices and that we should have an alternative for that, in his view, public financing of research and clinical trials.

Fair enough. I can live with both comments, but here are my caveats. Krugman suggests that higher taxes would be required, not only on the wealthy, but also on the middle class, and he correctly acknowledges the argument Bernie used to respond to Hilary in the debate. Namely, that the higher taxes would be more than compensated by the reduction or elimination of health care premiums charged by private insurance companies. But there is an important argument that was not raised by Bernie that also matters in this regard. More government spending on health (and Bernie wants that and more on  education, and more on infrastructure) does have, as far as the evidence suggests (at least most would agree that multipliers are positive, even if not huge), positive effects on the level of income, and, hence, on taxes. I haven't seen the dynamic scoring of such a health plan, but it seems reasonable to suggest that the increase in taxes wouldn't be confiscatory, and there should be no great middle class backlash against Medicare for all (in fact, the majority of the country still favors it).

On the same note, I might add, Krugman's argument that Medicare for all would be too disruptive is difficult to buy. One of the many arguments against Obamacare was that it was disruptive, particularly for small businesses, and that many people would prefer their previous plans. And even though Obamacare was badly launched, and created some disruptions, I think that Krugman would accept the notion that so far it is working, and that eventually (if we don't get Medicare for all) it's going to be particularly well regarded by the people that benefited from it (in the millions).

Dean is correct that pharmaceutical firms obtain incredible advantages in the US current system.* And I have nothing against public funding of research; quite the opposite. About one third, if private firms' numbers are correct, of research is already funded by the government, mostly by the National Institute of Health (NIH), the Department of Defense (DoD), and the National Science Foundation (NSF). But even if we maintain the system in which much of the research is funded by the private sector, there is no reason why we cannot regulate the pharmaceutical sector (btw, like the financial sector), control prices, and in cases of national health priority adopt generic medications.

That is why I would be for Bernie's solution, to strive for a single payer system, rather than accept that there is little that we can do about it. That was, as he reminded us, the plan of FDR and Truman. Remember also that if Hilary has moved to the left (and, arguably, she did) this is, in part, because she lost to Obama in 2008, and is getting heat from Bernie now. Bernie, even though he was not a Democrat (so what, Hilary was in high-school a Young Republican and "Goldwater Girl" in 1964, but she came to her senses later), is more representative of progressive Democratic values.

* On a different, and less relevant, note, I'm not sure I agree that the way firms get higher prices is from some sort of tariff like system that allows them to price above marginal costs. In his words:

"Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price."

Note that the notion that firms price at marginal cost is a fantasy. From a practical point of view firms basically tend to add a mark up on full costs (and also, almost no firm has increasing costs; but that is another story). And what really allows for exorbitant prices above full costs is the barriers to entry, some of which are caused by regulation and patents (tariff like as Dean notes), but also from the advantages of incumbency and from increasing returns or economies of scale. More importantly, the argument for patents is that they generate more of an incentive for investment, since firms can keep the proceeds from their research, but the evidence for that is scant at best.

Republican Presidential Debate and Faux Populism

On the Job numbers and more at the Rick Smith Show